Cheat Sheet

Summary:
High-level distillation of the drivers of selected currencies. - Click to enlarge
US Dollar
Jobs data ahead of the weekend should recover after a storm depressed the September jobs growth. The base effect will allow earnings to show a strong year-over-year gain.
The FOMC meets next week. A 25 bp rate hike in December remains the most likely scenario despite the heightened volatility in the stock market. With the effective Fed funds rate hitting the level of interest on reserves, there is scope for a new technical adjustment. It is possible, but seems unlikely, that the Fed would end the unwinding of its balance sheet.
The most likely results of the mid-term election, according to tracking polls is for the

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High-level distillation of the drivers of selected currencies. - Click to enlarge

US Dollar

Jobs data ahead of the weekend should recover after a storm depressed the September jobs growth. The base effect will allow earnings to show a strong year-over-year gain.

The FOMC meets next week. A 25 bp rate hike in December remains the most likely scenario despite the heightened volatility in the stock market. With the effective Fed funds rate hitting the level of interest on reserves, there is scope for a new technical adjustment. It is possible, but seems unlikely, that the Fed would end the unwinding of its balance sheet.

The most likely results of the mid-term election, according to tracking polls is for the Republicans to retain control of the Senate and the Democrats to secure a majority in the House of Representatives. It may not be an important near-term market factor.

The US dollar rose against all the major currencies in October but the Japanese yen. (around JPY113.15 puts the dollar down about 0.5% against the yen). At 97.00, the Dollar Index gained nearly 2% on the month, its best showing since May. The dollar appreciated against most emerging market currencies, but Argentina (~12.4%) and Turkey (~10.3%) staged recoveries, and investors were encouraged by the political developments in Brazil (~9.5%). Other Latam currencies led the declines with Chile (~-5.3%), Mexico (~-6.8%), and Colombia (-7.4%).

Euro

Growth slowed to 0.2% in Q3 after 0.4% expansions in Q1 and Q2. In 2017, the eurozone economy grew consistently at 0.7%.

Inflation ticked up in October, with the headline rate edging up to 2.2% from 2.1%. Half of EMU’s inflation is coming from food and energy. The core rate rose 1.1% from a year ago after a 0.9% pace in September. Core goods prices rose 0.14%, and core service prices rose 0.19%.

Merkel’s decision not to continue as CDU head and pre-announce no intention to seek re-election as Chancellor, nor an EU post, is significant even if the market impact is minimal. The next key development will be the CDU convention in December to choose a successor as party leader.

The euro fell roughly 2.2% in October. It is the second largest monthly decline this year after May’s 3.2% fall. It is near the year’s low set in mid-August near $1.13. We look for lower levels, and our near-term target is a little below $1.12. The recent decline has left technical indicators stretched, but we anticipate corrections to be capped now in front of $1.15.

Yen

The Bank of Japan left policy on hold as widely expected, though it did downgrade its inflation outlook which simply underscores the ongoing extraordinary monetary measures. The BOJ is trying to minimize the disruption of its bond purchases. The recent rout in stocks saw the BOJ step of its ETF purchases.

If US bond yields continue to trend higher, the BOJ could allow its bond yields to rise more. The central bank wants a steeper yield curve.

In January and February, when global equities lurched lower, the yen strengthened. The dollar fell from around JPY112 to around JPY106. This month the greenback proved more resilient despite a drop in equities of similar magnitudes. The dollar did fall from the year’s high near JPY114.60 to low by JPY111.40 and quickly rebounded, recouping almost 62%.

Sterling

The UK and EC may strike a deal on Brexit next month. The problem remains to sell it at home. A contingent of Tories may defect, perhaps 30-40 and it may turn on May being able to secure enough opposition support.

S&P warned that the failure to reach an agreement would send the UK into a four-five quarter recession that would see unemployment rise to as much as 7% (currently 4%). Hammond’s budget contained GBP500 mln for preparation for no agreement.

The Bank of England meets tomorrow. Governor Carney also has warned of the risk of a recession on a no-deal Brexit. No change in policy is expected until after Q1 19.

After reaching almost $1.3250 in the middle of the month, sterling tested the $1.27 area at the end of the month. Near-term potential extends toward $1.2850. It seems more likely to see $1.2900-$1.3000 before $1.26. This is also consistent with a firmer tone against the euro. Specifically, the euro’s momentum stalled near GBP0.8940 and a modest retracement of this month’s gains brings it toward GBP0.8830.

Canadian Dollar

The Bank of Canada hiked rates last week, bringing the overnight rate to 1.75%. The statement seemed more hawkish than the Governor, but investors are confident (80%+) of a follow-up hike in Q1 19.

August GDP was firmer than expected, rising 0.1% for a 2.5% year-over-year pace. Canada reports employment and trade figures ahead of the weekend. After a soft September jobs report, full-time job growth is expected to bounce back, as are earnings. Canada reported its first monthly merchandise trade surplus in August since December 2016. The driver was weakness in imports rather than a surge in exports. A second monthly surplus is expected to be reported.

Canada reports the IVEY survey and some housing data next week, leaving the Canadian dollar at the mercy of the general risk appetite and the general direction of the US dollar. A move above CAD1.3160 likely signals a run at the CAD1.3200-CAD1.3225 area. The trendline off the June, September and mid-October highs is found near CAD1.3115.

Marc Chandler is Global Head of Currency Strategy of Brown Brothers Harriman (BBH). Previously he was the Chief Currency Strategist for HSBC Bank USA and Mellon Bank. He has been covering the global capital markets in one fashion or another for 25 years, working at economic consulting firms and global investment banks. A prolific writer and speaker he appears regularly on CNBC and has spoken for the Foreign Policy Association. In addition to being quoted in the financial press daily, Chandler has been published in the Financial Times, Foreign Affairs, and the Washington Post. BBH provides specialist services and innovative solutions to many Swiss asset managers that include a global custody network of close to 100 markets, accounting, administration, securities lending, foreign exchange, cash management and brokerage services. Feel free to contact the Zurich office of BBH